German Commerzbank and securities marketplace Deutsche Boerse have completed PoC for a legally binding repo transaction using DLT

German financial services company Commerzbank and securities marketplace Deutsche Boerse have completed a proof-of-concept (PoC) for a legally binding repo transaction using distributed ledger technology (DLT).

A repo transaction is commonly used for short-term borrowing, and allows dealers to sell securities to investors — often for as short a time as overnight —  and repurchase them the following day, or as otherwise determined. For the party selling the security, the process is termed a repo, whereas for the counterparty, it is known as a reverse repurchase agreement.

For the DLT-enabled PoC, the repo transaction was based on a 10 million euro ($11.3 million) bond issued by KfW Bankengruppe, for a term of seven days at a negative interest rate of -0.5%.

To settle the transaction, Commerzbank and Deutsche Boerse generated digital tokens for both commercial bank money and securities. These were then simultaneously exchanged using a Commerzbank-operated DLT platform.

While Commerzbank’s R&D unit “Main Incubator” developed the DLT platform, the full scope of the technology used for the DLT-powered repo transaction PoC — as well as its underlying legal concept — was reportedly developed jointly by the two partners.

As a Commerzbank press release notes, the use of DLT to enable the legally compliant, efficient and transparent settlement of tokenized securities and cash tokens offers distinct advantages over existing legacy systems. These include real-time monitoring, a shortened settlement period, reduced counterparty risk, and a corresponding reduction in operational costs.

Michael F. Spitz, CEO of Commerzbank’s R&D unit, has given a statement on the significance of the PoC, noting that:

“In past [DLT] pilots we have focused on new issue projects; with the transaction between Deutsche Boerse and Commerzbank we were now for the first time able to convert existing securities into digital tokens.”

As the press release outlines, banks often use repo transactions as secured money market instruments in order to cover their “short-term liquidity needs by depositing securities.”

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